UAE corporate tax: Why businesses must have an efficient documentation system

As an accountant, I have always found the legal profession to be quite intriguing. Legal professionals possess brilliant analytical minds, are deeply educated, and have accumulated many years of academic and practical experience, all of which are rigorously tested before they are allowed to practise.

In my experience, I have observed that internal and external legal functions often have contrasting approaches when it comes to assessing risk. It is essential for any rational person, whether natural or juridical, to carefully consider all aspects before initiating legal action against another party.

Having said that, external legal practices tend to be slightly more inclined towards litigation compared to internal legal departments. This observation is not meant to be viewed as cynicism. By being detached from the internal dynamics of their clients, outsourced legal firms are able to take a more objective and straightforward approach when analysing the specifics of a case.

Numerous entities have suffered from poor decision-making as a result of Corporate Attention Deficit Disorder.

With the introduction of a plethora of new legislation and regulatory frameworks in the UAE since 2018, there exists a wealth of opportunities to explore. For some time now, I have anticipated the establishment of a regional court within the GCC to adjudicate cases falling under cross-border framework laws.

Remember that the GCC is a customs union, with an agreed-upon VAT law that will be fully enforced only when all six member countries have implemented VAT in their respective jurisdictions.

Recently, a significant VAT-related case was heard in Abu Dhabi, which also carries implications for corporate tax. Our ability to analyse this case and its potential consequences is only made possible because someone took the initiative to pursue legal action, despite the associated time and financial commitments.

The incident took place within the construction sector, which is not surprising considering the disputes that can arise from the continuous changes in such projects. It is essential to have properly executed deeds of variations to address these issues. It is advisable to seek guidance from your legal team or advisers.

In this particular case, neither the Federal Tax Authority (FTA) nor the Ministry of Finance were involved. The dispute was between a construction company and one of its suppliers.

Regarding the requirement for supporting documentation related to costs to reduce taxable profits for corporate tax, it should be approached similarly to claiming a refund for input VAT.

While there may be differences in the laws governing corporate tax, it is unlikely the principles will diverge significantly. It is crucial for all parties involved to be aware of and comply with these regulations.

The prosecuting party submitted a VAT reclaim in their periodic report, which was subsequently rejected by the FTA due to their inability to provide supporting supplier invoices in a timely manner.

It is a legal requirement for both VAT and corporate tax purposes that all deductions made are supported by legally compliant paperwork. Original documents are necessary, as photocopies or scans are not acceptable.

All reporting entities are expected to maintain a filing system that is organised, understandable, and easily searchable. Records must be kept for seven years and should be readily accessible.

Having a well-organised filing system is crucial but it is equally important to ensure that the paperwork contained within is compliant with the law.

Judgment No. 648/2024, rendered in favour of the plaintiff, determined the defending supplier must fully compensate their customer – the construction company – for the VAT that it was unable to reclaim.

It remains unclear whether the legal fees of the prosecuting party was also granted, as well as the duration of the case or if it was subject to an appeal by either party.

It is imperative to note that potential specific clauses within the sales contract between the parties may have influenced the court's decision.

Of particular interest is whether the FTA has conducted an audit on the supplier, given their issuance of non-compliant invoices. As many penalties are reiterative, this could be a very expensive addition to the case they just lost.

This should serve as a cautionary tale for all readers. Compliance is essential for good business practices.

It is important to note the UAE does not follow the principle of legal precedence. However, this does not guarantee that judges in future cases will not refer to similar decisions.

Precedence is the practice, for example, in the UK. Even there, a court of the same level can make an alternative judgment.

David Daly is a partner at the Gulf Tax Accounting Group in the UAE